The private equity industry has been running America for four decades. This is how the 'billionaire factory' emerged, and why the public has had enough.
One factor that incentivized pension plans towards private equity was the exceptionally low interest rate environment from the Federal Reserve for the last thirty years, making it almost impossible to fund pension obligations with bonds.
To me, the biggest issue raised in this excellent piece is the need to reform the bankruptcy laws. If the holders of the leverage-loans that fund private equity had recourse up the holding company chain to make the PE firms responsible for the debt they load on their targets, the industry would disappear.
I’m reading Peter Goodman’s Davos Man now and it is withering in its criticism of Scharzman, Larry Fink and others
PE treating companies merely as financial assets has given rise to their management as financial assets. IOW, their purpose is to optimize financial returns as opposed to optimizing the financial efficiency in conducting their business mission. They’re incentivized to not invest in redundant supply chains, or IT security, to suppress wages, reduce call center times, and to offshore intellectual capital. The companies don’t invest in innovation, customer service, or creating value for customers in any way. All of those are overhead costs, even when cutting into a company’s muscle.
We’re witnessing the damage done.
Sarah Bartlett's MONEY MACHINE is a good read on the rise of KKR.
Thanks for posting.
All I could think about while reading your preface was that the Carried Interest Loophole was recently preserved by centrist-progressive-turned-corporate-stooge Democratic Senator Kyrsten Sinema.
I worry about private pension plans. I am happy government has someone trying to made private equity accountable.
NOOOO!!! NO! NO! This is not correct..." but mostly had pensions through their corporate or government employer. Pension fund administration used to be straightforward...The country’s deregulatory turn in the 1980s changed all that."
ahhh, this drives me crazy. I hate to self-promote but I've been harping on this for years on my Youtube channel, the idea we all had pensions and everything was just great. It's NOT TRUE.
I recently did a video on this exact thing here. https://youtu.be/iVbzEQP7s5E and another here. https://youtu.be/Mazmw3obflM
In fact in my book You Can RETIRE on Social Security I debunk this stuff too.
Secondly, why did pensions go away? Reagan? Nope... ERISA...in 1974. Why? Because there were many a worker who's companies were being quite loose with the pension money and as such were left out to dry. ERISA was the supposed fix to that.
Guess what? The fix lead to defined contribution plans, (401ks, 403Bs, TSP) instead of pensions.
The 401k is a fundamentally superior to the pension for too many reasons to list here. Namely, you're not tied to your stupid job for 30 years to benefit!
You can leave, take your money with you and start a business, which is exactly what I did and would not have been able to do with a traditional pension.
As far as private equity, they can all kiss my shiny behind. Wealth tax now, as long as the funds are geared to propping up Social Security and medicare. No Ukraine money!
Agree with the comments below about the Fed. 'Lords of Easy Money' probably the best explanation of the problem. If the interest rates are too low and the system is flooded with cheap money, doesn't seem like pension funds have a safe option to get returns.
Appreciate this article but had to do a hard stop at this: ...the way a bank uses money in savings accounts to lend to companies." Will read the rest but here you go: https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp
Just a general observation (usually but not always true). The more successful an asset management company is at making money for investors.. the more money investors will pour in for it to manage. And the more its incentives deviate from that of the investor.
Beyond just non-transparent fee structures, PE managers also juice up their reported returns.. (at what sounds paradoxically, the investors expense).. there needs to be standardization around return reporting as well.
While investors will welcome the transparency that the SEC proposals will bring, I don't think this will necessarily bring fees meaningfully down. As much as pension funds care about the fees they pay, they care even more about performance. The name brand PE firms and those with great track records will have no problems commanding a premium for their perceived added value.
Obviously the new changes being considered to rein in private equity are during a democrat controlled administration and Congress. I’m wondering if over the decades leading to where we are now was this situation more the result of less oversight and more permissiveness on the part of republicans or democrats. Or are both sides equally guilty?
Matt when I read this article I meant to ask you "what's Gensler's track record?", since it might help to determine how much faith to place in him. Seemed to me he's a no-account do-nothing. But I figured maybe I was just ill-informed. Today I read the latest Doomberg dispatch (https://doomberg.substack.com/p/bed-bath-and-beyond-the-pale) about the recent stock/options market shenanigans surrounding Bed Bath and Beyond. Something any reasonable soul would expect Gensler to address. And the question comes up all over again. What is it that leads you to expect BIG things, or even anything from Gensler?
The number of publicly traded companies has been cut in half since the early 90's. Corporate debt is at record levels due to Leveraged Buy outs over the past 20yrs... Start ups have been on the decline for 30yrs.
My question is this, what is left for the Private Equity people to buy? Aren't they just swapping assets now by piling more and more debt on these companies?